Benefit Corporations: The Ultimate Challenge to the Friedman Doctrine

On September 13th, 1970, The New York Times published: “The Social Responsibility of Business Is to Increase Its Profits”, written by Milton Friedman. Friedman asserted that a company has no social responsibility to society because its sole concern is to increase profits for itself and its shareholders. The Friedman Doctrine has been debated for decades.  Nonetheless, corporate America has by and large operated as a profit-maximizing behemoth.

Enter the B Corps. You may or may not be aware of this term, as the concept is relatively new.  First and foremost, it should be noted: “B Corp” is often used to describe both “Benefit Corporations” and “Certified B Corporations”, although the two are not identical.

“Certified B Corp”: a company aspiring for this credential must undergo a rigorous audit-like process. Companies must take and pass the B Impact Assessment, amend their governing documents if necessary, and sign the B Corp Declaration of Interdependence. Certified B Corps pledge to create benefits for all stakeholders, and receive such certification from a third-party, non-profit organization, the “B Lab”.

“Benefit Corporation”: a legal corporate structure, recognized by approximately 30 states, which allows companies to embed sustainable principles into their DNA.  These constituency statutes vary among states. The basic provision of all benefit corporations is that each must seek to create a general public benefit and consider not only shareholders, but community, society, and the environment.

Benefit Corps have a long way to go before gaining mass appeal. At first glance, the concept is questionable. Are benefit corporations compromising profit to achieve some sort of social mission? Moreover, why must a company call itself a benefit corp to pursue social mission?

That being said, renowned B Corps such as Patagonia, Warby Parker, Etsy and Seventh Generation have had no trouble raising money from investors.  Some advantages to incorporating as a B Corp include: greater management flexibility, increased press and marketing, loyalty among like-minded consumers, and of course, the ability to pursue social missions and have a positive impact on society and the environment.

While I can understand the benefits (pun intended), B Corps are championing an extremely daunting task by attempting to lead a movement to change corporate America.  As investors, why should we invest in a company telling us we are not first priority? Telling us they will sacrifice profits if they see fit. Yes, the companies noted above have been able to achieve success both socially and economically, but they seem to be exceptions to the rule.

The real question is: at what level of uncertainty are investors no longer willing to invest?

6 thoughts on “Benefit Corporations: The Ultimate Challenge to the Friedman Doctrine

  1. Those of us who live in Massachusetts, New Hampshire, Maine or Vermont are aware of the Market Basket supermarket. This is a family business owned by two cousins, each cousin controlled 50 percent of the company. This is a significant enterprise with 80 or so stores and several Billion in revenues. The company had been managed by Arthur T, who paid the employees above the norm in the supermarket industry, but with by far the lowest prices in the area. His cousin, Arthur S wanted to presumably pay the employees less and raise prices – presumably to make more money. Arthur T’s formulae though had worked, as the supermarket was one of the fastest growing and profitable in the US. Anyway, the “greedy” cousin convinced a relative of Arthur T to switch sides and gained control of the company. The workers and the customers, in an unprecedented manner, boycotted the stores and the shelves were empty for 6 months. Arthur S had no choice but to sell the company. Here is an example of a company which by doing good was also very profitable – with such loyalty by workers and customers that they we willing to leave their jobs and for the customers willing to pay higher prices. This was not a B corp, but an example by doing good, a company can also earn excess returns if it engenders the loyalty of its workers and customers. Not for sure the fact that the supermarket had the lowest prices around helped. But the workers because they were paid so well, stayed with the company and were very productive, leading to low costs. Because the stores were low priced, volume was tremendous. Here is a model of a company which can be socially just and economically efficient. We don’t need B Corps. What we need is more examples of companies that by doing good – here it is social justice – those companies can earn excess returns. I am sure there are other companies already like this out in the marketplace.

    Like

  2. I would like to see more articles regarding social justice and business! Income inequality in this country is a serious issue, as well as too many low paid jobs

    Like

Leave a Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s